It’s tough for many retirees to handle the financial part of their lives. Retirees used to have a pension, and they could let other people worry about the financial markets. Now we have to take on that worry ourselves. But while we need to be watchful over our financial future, as long as we keep these five fundamentals in mind, we do not need to panic.
1. Figure out the best time to start Social Security benefits. Most financial experts advise us to put off applying for Social Security up until age 70. You get a 7 to 8 percent increase in your monthly benefit for every year you wait after age 62. You’d be hard pressed to find another investment that offers that good of a risk-free rate of return. But most people ignore this advice. Why? Because they have more important priorities than receiving a risk-free return on their benefits. So when is the best time to begin Social Security? As soon as you need it. If you hate your job and the stress is killing you, then retire at age 62 and go on Social Security. If you are in poor health or for whatever reason don’t expect to live beyond age 80, then start Social Security sooner rather than later. But if you’re carrying a lot of debt, have heavy family responsibilities or you expect to live to age 90, then it definitely pays for you to wait as long as you can up until age 70.
2. Keep the majority of your IRA and other savings in the stock market. The market goes up and down, but it has demonstrated time and again that it is virtually the only investment that keeps growing at a rate higher than inflation. And unless you have some sort of specialized skills or knowledge, the evidence clearly shows that the best return comes from a low-cost, no-load index exchange-traded fund or mutual fund, such as the Vanguard Total Stock Market fund (VTSMX) or the Fidelity 500 fund (FUSVX). Do not invest in Twitter, Facebook or any other “hot” individual stock. Retirement is no time to take on additional risk. So however much CNBC gushes about social media, just remember that financial reports on TV are as much about entertainment as they are about information. So go ahead and be entertained. But do not gamble away your future.
3. You should own a few bonds or bond funds. Interest rates are unusually low, which means the price of bonds — corporate bonds, Treasury bonds and municipal bonds — are at the high end of their historic range. In other words, bonds are expensive and likely to lose value over time. However, the experts can be wrong, and low interest rates may stick around longer than anyone thinks. In the meantime they give you a better income stream than a typical basket of stocks. Now is not the time to buy a lot of bonds. But retired people need some income and diversification, so bonds should make up at least a small portion of any retired person’s portfolio.
4. Keep at least a year’s expenses in cash. If you’ve been down to your neighborhood bank shopping for a certificate of deposit, you’ve probably experienced some sticker shock. Not at the high prices, but at the insultingly low interest rates the bank is offering for a savings account. Nevertheless, with the economy uncertain and stock prices and bond rates jumping around like a live wire, retirees should limit their risk by keeping some money in a federally insured bank deposit. You want to have access to enough cash to keep you going for a while — perhaps even a few years — so you’re not forced to sell investments when the market is suffering.
5. Economize when you can. When the economy is good, you’re working and inflation is in the air, then it’s a good time to take on new debt for a car, house or college. But retirees live on a fixed income. That means you will never get another raise. So you shouldn’t take on new debt. And you shouldn’t get in the habit of spending more than you’re taking in. After all, if you can’t pay off your credit card now, what makes you think you’ll have the money to pay it in the future? Just be careful about spending more than you should, because you aren’t likely to have the extra resources to pay off a tax lien or get a debt collector off your back.
Tom Sightings blogs at Sightings at 60.
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The 5 Fundamentals of Retirement Finances originally appeared on usnews.com
